Around 1537ET YHOO shares began a flash-crash-like free-fall with ascending volume on an accelerating plunge in price. BABA did not snap until 1544ET when it cracked lower and the arbs desperately tried to keep the two firms tied together somehow.

Initial chatter was import tariff news from China (which may have explained the huge divergence between the two), but soon after Bloomberg reported that the U.S. Internal Revenue Service is considering a rule change that might complicate YHOO efforts to exit its BABA stake ‘efficiently’.

As Bloomberg explained, that could have an impact of Yahoo’s plans to hold a tax-free spinoff of its shares in Alibaba, a plan that Yahoo unveiled in January as it seeks to maximize the return of cash to shareholders.

The potential change would affect the IRS’s rules for spinoffs of trades or businesses that are small compared with a company’s other assets.

and it was clear that the arb between YHOO and BABA was breaking down…

The deal is a critical step for Chief Executive Officer Marissa Mayer, who came under pressure from Starboard Value LP and other investors to return cash to shareholders, find ways to cut taxes and avoid major acquisitions. The Asian assets, including a stake in Yahoo Japan Corp., have supported Yahoo’s value and given Mayer, who became CEO in 2012, cover from shareholder pressure as she worked to turn around Yahoo.

Isaac Zimbalist, senior technician reviewer at the IRS’s Office of Associate Chief Counsel (Corporate), said on Tuesday the government agency is considering changes to rules concerning spinoffs. The IRS will hold in abeyance any ruling requests received starting today as the issue is studied, Zimbalist said at a D.C. Bar Association event.

Ruling requests already received by the IRS will continue to move forward, but that is subject to change.

“The issue comes down to whether we’ve dropped a hot dog stand or a lemonade stand into a business that is primarily publicly traded stocks, cash and other wonderful things that I call appreciated property,” Zimbalist said.

Yahoo’s plan is to put Yahoo’s holding in Alibaba into a newly registered firm called SpinCo, which will own all of Yahoo’s 384 million Alibaba shares that were valued at $40 billion at the time, as well as a smaller, ancillary legacy business. Shares in SpinCo will then be distributed to existing Yahoo shareholders as a separate public company, according to the plan.